The Fed holds steady: At its recent meeting, The Federal Reserve left interest rates unchanged. While inflation has come down from its highs, it’s still above the Fed’s 2% target. Chairman Powell pointed out that the job market remains strong and the economy is growing at a steady clip. The Fed plans to keep rates where they are until it sees clearer evidence that inflation is firmly under control.
The Trump administration continues to ratchet up the rhetoric in pressuring the Federal Reserve to lower rates. Based on the hotter than expected PCE inflation reading out this week, I expect the White House to be disappointed and the Federal Reserve to continue to hold off. The tension between the two is expected to continue.
Tax cuts and tariffs in focus: In Washington, Senate Republicans are working on a bill to extend the Trump-era tax cuts and add more funding for defense and border security. While the plan would keep lower individual and corporate tax rates in place past 2025, it’s raising concerns about increasing the federal deficit. Lawmakers are hoping to move it forward before the election season heats up although passage is looking less likely. Cuts to Medicare, the SALT deduction, and a massive addition to the deficit are the three main points of contention.
The White House says progress is being made on trade deals with China and other major partners. President Trump recently announced a deal with China, but officials later clarified it was more of a framework to secure rare earth mineral exports, not a full trade agreement. In return, the U.S. plans to ease some trade restriction. Talks are also underway with other countries. The administration hopes to finalize deals with about ten key partners by Labor Day. With a temporary pause on broader tariffs set to end July 9th, businesses are waiting to see if these agreements will bring some stability to trade policies that have been shifting for months.
Signs of strained consumer spending: New numbers out this week show that U.S. consumer spending dipped slightly in May, the first decline in three months. Spending fell by 0.1%, adjusted for inflation, hinting that households are starting to feel the pinch of high prices and borrowing costs. Since consumer spending makes up to about two-thirds of the economy, even small pullbacks can affect business profits and overall growth. It’s too soon to call this a trend, but it does highlight the Fed’s challenge in trying to cool inflation without slowing the economy too much.
Looking ahead: This week’s headlines are a good reminder that markets are balancing strong business fundamentals with a fair amount of policy uncertainty. Rates are likely to stay high for a while, trade tensions could flare up again, and if consumers keep pulling back, growth could slow. The good news is that markets have clawed their way back towards their highs in February. The prospect of AI increasing efficiency and corporate profits along with an eye towards lower rates in the future are likely justification for the markets moving forward.
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Disclaimer: This material is for informational purposes only and should not be considered financial, tax, or legal advice. Always consult with a qualified professional regarding your specific situation. All investment strategies involve risk, and there is no assurance that any strategy will achieve its intended results.